ASIC'S EVOLUTION MEANS BETTER REVOLUTION

Written on the 13 September 2010

FROM time to time our corporate watchdog gets served up some fairly earnest criticism around its effectiveness as a corporate and market regulator.

But ASIC is intent on improving its report card and sharpening its skill set to bring to bear a more in-depth understanding of the practical application of our laws to specific economic sectors. It started this journey some years back when, applying the wisdom of private practice, they began to reorganise themselves along industry and stakeholder lines.

The upshot is that, without any need to change our laws or tighten regulation, we are seeing more intervention from a regulator that is better armed to scrutinise and actively engage in both enforcement and prevention of undesirable economic and market behaviours, and we expect to see more.

One of the more obvious and transparent ways in which this is occurring is the recent takeover by ASIC of market supervision responsibilities from the ASX, driven by a need to create an independent supervisor as more competitors seek licences to operate recognised stock exchanges within Australia. To ensure it is properly equipped for the job, ASIC has now effectively absorbed ASX’s market supervision team of around 24 employees, who already have the requisite knowledge and experience to hit the ground running.

As part of the new approach to bolstering market integrity and reducing market manipulation, ASIC will focus on the role of the broker, as brokers are not only at the forefront of buying and selling, but are typically one of the most significant conduits of market information (both confidential and public) and often play a key role in controlling its dissemination. In effect, ASIC is now better equipped to carry out surveillance of market practices, both holistically and with the necessary power to scrutinise those at the hub of the wheel.

A better example of the strength gained by ASIC through its push for industry knowledge, is perhaps one of the far less publicised initiatives that the organisation has been rolling out.

ASIC’s Perth office has led the way in better understanding the energy and resources sector, by plugging into industry through active participation in working groups - educating themselves on the operation of JORC and reporting requirements for oil and gas and the interaction of both with the disclosure obligations and misleading/deceptive statement rules in the Corporations Act.

ASIC’s Brisbane office is now following the lead by focusing on the industry codes and reporting requirements as they relate to Queensland, particularly with the large scale gas projects proposed in this state.

In fact ASIC now has a full-time geologist on board to assist in scrutinising the content of market releases, prospectuses and investor information and to educate ASIC officers on better performing this role.

We are now seeing the culmination of these efforts as ASIC turns up the heat on companies disclosing exploration results and the completion of key mile stone events like a BFS. Most relevantly, the type of information contained in such disclosures often includes forecasts and projections. Consequently, JORC level disclosure alone is not enough.

Disclosures must meet the requirements of JORC, the Corporations Act and ASIC guidance on prospective financial information. Care should be taken to ensure that key statements around NPV and life of mine are supported by JORC compliant ore reserves (and not based on indicated or measured resources which do not form part of the reserve, or a combination of those resources and the reserve). A clear distinction between exploration results and exploration targets is also a must. Sign-off by a JORC competent person alone may not ensure compliance.

While this may mean that getting your disclosures right is a little tougher, our experience shows that ASIC has adopted an open door policy and is willing to engage in consultation with companies on an individual basis to provide assistance and prevent Corporations Act contraventions (of course, not giving any legal advice).

This approach is a positive one and very encouraging. With ASIC officers now better versed in the nuances of your industry, they are more willing to engage in the necessary dialogue to improve the quality of market information. ASIC has also flagged that it may release a guidance note in future on what it expects of the energy and resources sector in terms of disclosures.

All of this highlights that there is fluidity in the manner in which current laws are regulated and it is not necessary for laws to actually change in order to necessitate a change of corporate behaviour. Your corporate lawyer can add value by staying close to regulators and keeping you informed of trends in their approaches.